Tuesday, January 27, 2009

Wall Street Journal: As Hotel Vacancies Rise, So Do Risks of Default

We talked about the 'staycation' (due to $4 gas) in the summer; now we are facing the staycation due to economy (but not to worry, people in staycations will soon revive the auto and housing market with the cheap money Uncle Ben B is handing to them) Yes... many more future workers for the steel toed future of the infrastructure laden Obamaconomy as hotels go half empty. Keep bidding up those commercial real estate stocks; certainly all that future unoccupied land won't effect supply/demand or prices. Not in the peaceful bliss of the Obamaconomy.

I'd be worried about this but as the 2nd half recovery begins in 5 months, all our problems disappear into the ether.
  • The downturn in the U.S. hotel industry is becoming so acute that it has thrust the sector into crisis, leaving vacancies at a 20-year high and putting many properties in danger of missing payments to lenders. In the wake of cutbacks by business and leisure travelers alike, U.S. hotels this month are expected to post their 15th consecutive month of declining occupancy, longer even than their 12-month losing streak after the Sept. 11, 2001, terrorist attacks.
  • That occupancy drain, coupled with declining room rates as hotels compete for customers, is expected to result in the hotel industry's steepest decline in revenue per available room since 2001, according to market-research company PKF Consulting Inc.
  • If conditions are as weak as expected, PKF estimates that nearly 20% of a sample of 1,500 U.S. hotels that it studied won't generate enough cash flow this year to cover interest payments on their mortgages, up from nearly 16% last year.
  • U.S. hotels now carry roughly $250 billion in cumulative mortgage debt, according to Foresight Analytics LLC. Many hotel owners who can't generate enough cash to cover their debt service in this recession will avoid default and foreclosure by digging into their own or partners' resources to make up the shortfall or by negotiating a compromise with their lenders. ($250 Billion? PEANUTS! Just put it on the tab. To the printing presses Ben!)
  • Exacerbating the industry's troubles is a flood of new rooms hitting the market because of development projects started during the real-estate boom of recent years. .....estimated 125,000 net new rooms projected to debut in each of this year and 2010.
  • Among commercial real-estate categories, the hotel industry rises and falls the most dramatically in reaction to economic cycles. That's because, unlike office buildings and shopping malls with long-term leases, hotel occupancy and rates change on a nightly basis as customers come and go at will. In a downturn, the fallout is significant; PKF expects the average occupancy among U.S. hotels to drop to 57.6% this year, falling by 3.2 percentage points, to its lowest level in the 20 years that Smith Travel Research has tracked the figures.
  • "The only word that comes to mind is 'unprecedented,' " said Bjorn Hanson, a lodging and tourism professor at New York University, referring to the speed and depth of the industry's decline in recent months. (yes... yes... we've been using that word a lot of late)
The New York Times also chimes in on the high end
  • Hotel revenue is down sharply. Big new projects, planned in the boom days, are either sitting unfinished or left on the drawing boards. And some high-end hotel owners now face an unhappy situation — how much can they cut prices to fill their rooms before they damage their hotels’ luxury cachet?
  • I don’t think anybody realized the switch was going to be turned off so quickly,” said Lisa Grossberg, the general manager of the Buckingham Hotel in Midtown Manhattan. “We saw people being more rate-conscious; we saw the renegotiations of corporate contracts as companies tightened their belts in the fall. But then in the middle of December, everything just about stopped.
  • For the week of Jan. 11 to 17, the average revenue per available room — the standard measure of hotel performance — fell 16.4 percent over the comparable week in January 2008 in hotels in the United States. Average occupancy fell 12.9 percent, and average daily room rates declined 4 percent.
  • The figures for luxury hotels were even bleaker. Occupancy rates fell 24.4 percent in the week that ended Jan. 10 compared with the first week of January 2008, Smith Travel Research found. Average daily rates fell 8.9 percent. Luxury hotels are heavily dependent on high-end business travel, corporate meetings and international visitors — all of which have fallen.
  • Some business travelers who were formerly authorized to stay at five-star hotels are now restricted to four-stars (which include so-called big-box urban hotels like Sheraton or Hilton). And big-box hotels are also dropping prices, adding to their lure.
  • But she said: “This one is a really big downturn, a scary one that isn’t confined to one niche or one segment of the country. It’s different than anything before, and I don’t know where the bottom is. For now, it’s just survival of the fittest.”
Sometimes it "is different this time"


A few of the more well known players in this industry below - OEH looks particularly "in trouble" going off chart alone.
  • A leading shareholder of Orient Express Hotels (OEH) said he would stick with the shares of the hotels and luxury leisure group for the long term, despite a near 90 percent fall in the stock price this year. "We are long time players. There is great value embedded in this company," said Francois Reyl, chief executive of Swiss finance firm Reyl & Cie. (ah, the good ole "if we hold it long enough, we'll lose 50% of our investment instead of 90%)
  • The company also announced it would suspend quarterly dividend payments in order to save cash. (hmmm, always an interesting sign)
Holiday Inn, Crowne Plaza


Westin, Sheraton, Four Points - Sam Zell is involved in this one now

"deluxe hotels" worldwide

And look who is doing the best (it's all relative): the "Walmart" of hotels

Quality Inn, Comfort Inn, Econo Lodge

No position

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